If the recent financial crisis reveals a problem with the Ayn Rand view that free markets can police themselves, Former Fed Chairman Alan Greenspan doesn’t see it. Greenspan will testify before the Financial Crisis Inquiry Commission on Wednesday, and I asked him about his free market mentor Ayn Rand in my exclusive “This Week” interview. Greenspan said, “I think that there is no alternative if you want to have economic growth, higher standards of living, in a democratic society, to have competitive markets.” The major mistake, he said, was in “assuming what the nature of the risk would be.” Greenspan added, “That’s the critical mistake. And I made it. Everybody that I know who works in this business made it. And it means that basically we have to work our way back to understanding what went on.”
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TAPPER: You’ll be testifying about the financial crisis on
Wednesday before the Financial Crisis Inquiry Commission. When you
testified before Congress in October, you said that you finally saw a
flaw in — in the way that you looked at markets, that markets cannot
necessarily be trusted to completely police themselves.
But isn’t it — isn’t it more than a flaw? Isn’t it an indictment
of Ayn Rand and the view that laissez-faire capitalism can be expected
to function properly, that markets can be trusted to police themselves?
GREENSPAN: Not at all. I think that there is no alternative, if
you want to have economic growth and higher standards of living, in a
democratic society, to have competitive markets. And, indeed, if you
merely look at the history since the Enlightenment of the 18th century,
when all of those ideas surfaced and became applicable in public policy,
we’ve had an explosion of economic growth, and especially in the
developing countries, where hundreds of millions of people have been
pulled out of poverty, of extreme poverty and starvation, basically
because we have competitive markets.
So it’s not the principle of competitive markets which really has no
alternative which works. It is a strict application — as I presented
in a Brookings paper fairly recently on a somewhat technical area, the
major mistake was assuming what the nature of risk would be. And the
reason it was missed is we have had no experience of the type of risks
that arose following the default of Lehman Brothers in September 2008.
That’s the critical mistake. And I made it. Everybody that I know
who works in this business made it. And it means that basically we have
to work our way back to understanding what went on. And as I argue,
what we need is far more required capital for financial institutions
than we’ve had.